New Money in Venture Capital

Venture capital is having a bit of a moment.  Companies that are venture-backed are going public and weekly we seem to hear about another “unicorn”, which is a venture-backed company that is worth $1B dollars or more.  Of course, they don’t tell you about all the failures.

I saw two interesting pieces on VC in the last two days.  The Financial Times had an opinion piece by Richard Waters on VC.  It’s behind a paywall, but essentially it says new entrants are remaking the VC space.  In the “old” days, venture capital was a tight-knit club.  The new entrants like Softbank and Tiger Global have huge sums of cash and aren’t afraid to spend it.  I have seen Softbank try to buy a market when it came to co-working and WeWork.  It didn’t work out so well but other companies they have invested in have done very very well.

Well enough so they are still investing.

One thing I postulated years ago is that as long as international central bankers keep creating money and holding interest rates at close to 0%, or even negative rates in many cases, there will be a marked change in the risk appetites of investors. Initially, money went into the stock market and continues to be there.  However, I am seeing big companies and pools of capital start to reach for yield in bond markets, buying riskier higher-yielding bonds instead of safer government securities.  They need the return to cover their liabilities.

The returns have attracted new entrants that don’t subscribe to the rules of the club and the club isn’t exactly happy about it.

Packey McCormick wrote an interesting blog about a company, Unit 21.  I am invested in Catalytic, which was the first company in this no-code space.  This is what was interesting to me about the blog post.

As Unit21 started talking to VCs after Q1, Tiger Global got in touch. Tiger had already done a lot of its due diligence upfront, and when they spoke, Tiger asked Unit21 for two things: 

1. To send them its numbers. 
2. A target valuation range. 

The next day, Tiger sent Unit21 a term sheet to lead its $34 million Series B at a$300 million valuation, 25% above the high end of its valuation range. When Tiger wants to win a deal, it doesn’t fuck around. I asked Trisha what Tiger looked at when pricing the round, and she said it was simple: 

1. Customer and revenue growth
2. Total market size
3. Opportunity to expand into new areas

“For everything else,” she told me, “they trust it’ll get done.” 

Unit21 signed with Tiger, and ICONIQ Capital, the family office of Mark Zuckerberg, Sheryl Sandberg, Jack Dorsey, and Jeff Weiner, joined in, along with all existing investors. 

It was a huge round at a large valuation.  You hear stories of early-stage investors moving very quickly with little diligence but you rarely hear about it with later-stage deals.  The other thing to bear in mind is this was a “Series B”.  Back when I started investing in startups (2005) a Series B was sub $100M in valuation.

There are returns at Series B, but as Professor Steve Kaplan at Chicago Booth has shown in his data on venture investing, the real return is when you invest at Seed and Series A.  You have to be early to see the really consistent blowout returns.  When you get a company that is doing well, you need to press your bets and keep investing up to or beyond your pro-rata.  I learned that when I traded in the trading pit as well.  Cut your losers, figure out how to scratch them if you can.  Press your winners.

Even with all the innovation and all the cool stuff being built, I still think that basic economic principles and math win.  I also think that when you are investing in the space, it pays to act like a caddy on the golf course and not the tournament director.

More money will try and find its way to startups.  I do think the traditional fund model is breaking down in some ways.  The trick will be the money has to find its way through someone that has access or insight into a particular idea/sector/thesis, and is trusted by the entrepreneur so they know the capital coming in has their back.

The post New Money in Venture Capital first appeared on Points and Figures.